Posts Tagged ‘examiner’

For interested parties in most large Chapter 11 cases, apparently not much.

Bankruptcy “examiners” are private individuals appointed by the Office of the Unites States Trustee at the direction of a Bankruptcy Court to investigate and report on the causes of a company’s failure.

Chapter 11 of the Bankruptcy Code provides that examiners “shall” be appointed if requested in any case involving, among other things, more than $5 million in certain types of unsecured debt. In creating this position, Congress apparently expected examiners to be ubiquitous in the reorganization of large, public companies.

Nevertheless, it simply ain’t so. Anyone with restructuring experience can attest to the truisim that examiners are a rarity in Chapter 11 cases.

Earlier this month, Temple University Professor Jonathan Lipson posted statistical analysis on the appointment of bankruptcy examiners – and why, despite the mandatory language addressing their appointment in the Bankruptcy Code – so few are, in fact, actually appointed.

In “Understanding Failure: Examiners and the Bankruptcy Reorganization of Large Public Companies,” Lipson – whose work will appear in a forthcoming edition of the American Bankruptcy Institute Law Journal – observes that examiners are rarely sought in Chapter 11 cases, and even less frequently appointed. Lipson’s docket-level analysis of 576 of the largest chapter 11 reorganizations from 1991 to 2007 shows they were requested in only 15% of cases. Despite the seemingly mandatory language of the Bankruptcy Code, examiners were appointed in fewer than half of the cases where sought, or less than 7% of the sample.

So what does it take to get an examiner appointed? Lipson summarizes the article’s findings as follows:

- Size matters. Cases in which examiners are sought are huge. The average case in which an examiner was sought was almost twice as large as the sample measured by median asset values and more than four times larger measured by mean asset values. Holding other things equal, a request for an examiner was three times more likely in a case with a debtor having at least $100 million in net assets. Cases in which examiners were appointed had mean liabilities twice the size of cases where the motions were not granted.

- Conflict matters. Cases in which examiners were sought or appointed were much more likely to be contentious, as measured by docket size and requests for chapter 11 trustees, than were cases without. Holding other things equal, a request for a chapter 11 trustee in a large case increases the odds of an examiner request by a factor of five.

- Venue matters. Examiners are much more likely to be sought—although not necessarily appointed—in the two districts that tend to have the largest cases, Delaware and the Southern District of New York (SDNY). Together, Delaware and the SDNY had forty-six (52%) of requests for an examiner, but actually appointed an examiner in only seventeen cases (about 43%). By contrast, examiners were appointed in twenty-two cases (about 57% of appointments) when requested in other districts.

- Fraud matters—somewhat. Although requests for an examiner correlated with allegations of pre-bankruptcy fraud—the paradigm grounds for an examiner—they were nevertheless rare even when a bankruptcy was precipitated by that form of wrongdoing: Of the thirty-one cases in the sample that allegedly involved fraud, examiners were sought in only nine and, of those, were appointed in only five.

- Strategy matters—somewhat. There is evidence that examiners will sometimes be sought for strategic, not information-seeking, reasons. Requests to appoint an examiner were withdrawn in fourteen cases (about 17% of requests in the sample) and rendered moot by subsequent events (e.g., plan confirmation) in sixteen cases (about 20% of requests). Judges and system participants interviewed for [Lipson’s] paper indicated that they believed that, in many cases, the arguably “mandatory” language of the Bankruptcy Code produces gamesmanship,not enlightenment.

- Investors do not matter much. Notwithstanding a purported goal of protecting the “investing public,” individual investors made only eighteen requests for examiners. Far more likely to request an examiner (thirty-two cases) were individual creditors whose claims did not arise from investment securities (such as bonds) or fraud, but who apparently held claims for unpaid goods or services.

Lipson’s work provides empirically grounded insight on this little-used feature of Chapter 11, and is well worth a read.

Several weeks have passed since Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey briefed US District Judge David Godbey on the liquidators’ request for US recognition of their proposed Antiguan liquidation of Stanford International Bank, Ltd. (SIB).

Readers will recall that Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, a federal receiver appointed in Dallas’ U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford (links to prior posts can be found here). Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

One of the preliminary questions in these proceedings is which of them will receive deference from the others. Of particular interest is which proceeding – and which court-appointed representative – will control the administration of SIB. The Eastern Caribbean Surpeme Court (Antigua and Barbuda) has found, perhaps predictably, that SIB’s liquidation is to be adminsitered in Antigua. It also has found that Mr. Janvey has no standing to appear as a “foreign representative” or otherwise on behalf of SIB or other Stanford entities.

In London, the English High Court of Justice, Chancery Division’s Mr. Justice Lewison reached a similar conclusion in early July. Based on a determination under English law that SIB’s “Center of Main Interests” (COMI) is in Antigua, he designated Messr’s. Wastell and Hamilton-Smith as “foreign representatives” of SIB for purposes of Stanford’s English insolvency proceedings.

In Dallas, meanwhile, Judge Godbey has permitted the Antiguan liquidators to commence a Chapter 15 proceeding under the US Bankruptcy Code and to make application for similar recognition of SIB’s Antiguan liquidation in the US. Messr’s. Wastell and Hamilton-Smith and Mr. Janvey have each briefed the question of whether, under US cross-border insolvency law, that liquidation ought to be recognized here as a “foreign main proceeding” – and, more specifically, whether Antigua or the US is the properly designated COMI for SIB.

In briefs submitted over six weeks ago, the liquidators urged a finding consistent with that of the English and Antiguan courts. They argued essentially that a debtor’s “principal place of business” is essentially the location of its “business operations,” and referred repeatedly to SIB’s undeniably extensive physical and administrative operations in Antigua.

In opposition, Mr. Janvey argued strenuously for a finding that SIB’s COMI is, in fact, the US. He did so relying largely on the contention that, despite SIB’s physical location and operations in Antigua, Sir Allen allegedly “spent little time in Antigua” – and that Sir Allen effectively managed and controlled SIB from the US. Mr. Little, the examiner appointed by Judge Godbey to assist him in overseeing the receivership, generally concurred with Mr. Janvey.

Last week, Mr. Janvey’s contention may have received a set-back.

The United States Fifth Circuit Court of Appeals recently upheld a detention order confining Sir Allen to the US pursuant to a separate federal indictment issued against him – and in so doing, concurred in the lower court’s conclusion that Sir Allen’s ties to the State of Texas were “tenuous at best.” The Fifth Circuit’s 3-judge panel recognized that Stanford “is both an American citizen and a citizen of Antigua and Barbuda, and has resided in that island nation for some fifteen years,” and further noted:

Stanford admitted that he established a new residence in Houston in preparation for his required presence during the pendency of the case against him. Several of his children have recently moved to Houston to be closer to him during the proceedings. While Stanford did grow up in Texas, he has spent the past fifiteen years abroad. His international travels have been so extensive that, in recent years, he has spent little or no time in the United States . . . . [O]ne of Stanford’s former pilots [testified] that Stanford . . . engaged in almost non-stop travel on the fleet of six private jets and one helicopter belonging to [Stanford Financial Group] and its affiliates . . . .

On September 1, Messr’s. Wastell and Hamilton-Smith sought leave to file the Fifth Circuit’s order in support of their prior application for recognition, and over Mr. Janvey’s anticipated objection.

It appears that where Sir Allen’s indictment is concerned, home is where the corporate jet is.

Nearly two weeks ago, this blog highlighted further scuffling in the ongoing contest for administrative control between Ralph Janvey – a federal receiver appointed at the SEC’s behest to seize and administer financial assets once controlled by Sir Allen Stanford, and Peter Wastell and Nigel Hamilton-Smith – English liquidators charged with liquidating Stanford International Bank, Ltd. (SIB), an Antiguan entity through which Stanford did significant amounts of business.

To summarize prior posts – available by linking here – Wastell and Hamilton-Smith have sought recognition of SIB’s Antiguan liquidation through a Chapter 15 case commenced before U.S. District Judge David Godbey in Dallas. Janvey, along with the SEC and the Internal Revenue Service, vehemently oppose recognition of the Antiguan liquidation as the “main proceeding” in the Stanford entities’ administration.

In an extensive brief filed earlier in the month, Mr. Janvey – joined by the SEC in separate briefing – detailed his reasons for doing so. In essence, Mr. Janvey and the SEC claim that the “center of main interests” (COMI) of an investment fraud – which the SEC alleges Stanford perpetrated – is headquartered where the fraud is . . . and not from the presumptive location where the victims were led to believe a legitimate business was run. They also appear to place heavy reliance on the fact that, though SIB was physically located in Antigua, it was not authorized to do regular business with local residents – and its liquidation therefore resembles numerous hedge fund liquidations that, to date, have experienced difficulty obtaining recognition as foreign “main proceedings” in other US Bankruptcy Courts.

In a 25-page reply brief, supported by extensive Appendices, Wastell and Hamilton-Smith explain that Janvey’s “fraud-based” argument is beside the point – as is the fact that SIB was maintained primarily for “offshore” operations in the US, South America, and Europe.

Instead, the liquidators claim that the extent of SIB’s physical operations in Antigua make its liquidation far different from the “letter-box” entities in Caribbean tax havens that US Bankruptcy Courts have, to date, been reluctant to recognize. Wastell and Hamilton-Smith rely heavily on a California decision – In re Tri-Continental Exch. Ltd., 349 B.R. 627 (Bankr. E.D. Cal. 2006) – which involved alleged “sham” insurance entities that sold fraudulent insurance policies to US citizens through a network of domestic brokers and agents, but whose 20 employees and only office were operated in St. Vincent and the Grenadines. Over the objection of a US judgment creditor, the U.S. Bankruptcy Court in Tri-Continental recognized as the foreign “main proceeding” a liquidation commenced through the Eastern Caribbean Supreme Court, holding that even through the fraud was perpetrated primarily in the US and Canada, the debtors’ COMI was in St. Vincent and Grenadines because the debtors “conducted regular business operations” there. 349 B.R. at 629.

Using this analysis, Wastell and Hamilton-Smith argue that SIB’s Antiguan liquidation should likewise be recognized as a foreign “main proceeding” since, as even Mr. Janvey acknowledges, a debtor’s COMI is tantamount to its “principal place of business” under US law. According to the liquidators, a debtor’s “principal place of business” is essentially the location of its “business operations,” and their brief refers repeatedly to SIB’s extensive physical and administrative operations in Antigua. Wastell and Hamilton-Smith appear to tiptoe around Mr. Janvey’s argument that the Court should look to the debtor’s “nerve center” (in this case, the location of executive decisions) where a business’s operations are “far-flung,” using a brief (and conclusory) footnote to draw a distinction between the Stanford entities’ admittedly “far-flung” sales, on the one hand, and its operations on the other – which, according to the liquidators, were concentrated exclusively in Antigua.

Judge Godbey’s appointed examiner is due to weigh in on these issues shortly after the US July 4 holiday.

A prior post on this blog mapped out the field of combat in the brewing battle between SEC receiver Ralph Janvey and Antiguan liqudators Nigel Hamilton-Smith and Peter Wastell for control of the now-defunct financial empire of Sir Allen Stanford, the native Texan who acceded to Antiguan knighthood but who now stands accused of running an alleged world-wide Ponzi scheme.

That battle has now commenced.

To review, the Securities and Exchange Commission obtained appointment of a receiver for Stanford’s assets and the Antiguan government appointed liquidators for Stanford International Bank, Ltd. (SIB) within 3 days of one another. The Receiver’s and the liquidators’ initial attempts to cooperate degenerated into a battle for control over global efforts to marshal assets and make distributions to creditors.

The parties recently brought their disputes before the US District Court in Dallas, where Judge David Godbey must now decide (i) whether his previously-issued receivership order (which prohibited the commencement of any bankruptcy proceeding during the pendency of the SEC receviership) should be modified to permit the liquidators’ commencement of a Chapter 15 case regarding SIB; and (ii) whether the Chapter 15 proceedings (if any) ought to be referred back to the Dallas bankruptcy court (itself a division of the District Court).

A hearing on these disputes has yet to be scheduled. However, the parties have put forth the following arguments (to see the parties’ respective briefs, click on each applicable party’s name):

– The US Government. The federal government – and more specifically, the SEC and the Internal Revenue Service – oppose the commencement of a Chapter 15.

The IRS complains that doing so will disrupt its efforts to litigate tax claims against Sir Allen. In essence, the IRS trusts Judge Godbey’s ability to facilitate this litigation more than it does the Antiguan court system. It also warns that the Antiguan liquidation scheme will not respect the IRS’s asserted tax liens against Stanford’s assets – including SIB assets – and will not sufficiently protect US taxpayers and investors.

The SEC, in an argument that appears somewhat circular, reminds Judge Godbey that he originally imposed a stay on extraneous litigation in connection with the receivership; therefore, that stay ought not to be modified because . . . to do so would countenance extraneous litigation.

In a footnote, the SEC signals its willingness to appeal an adverse ruling by noting that where the receivership order has already been appealed by other third parties, Judge Godbey is without jurisdiction to make any further amendments to it – but must instead preserve the status quo. At a substantive level, the SEC intimates that the pre-liquidation relationship between SIB and the Antiguan goverment was overly cozy and that because SIB lent over US$100 million to the Antiguan government (and holds approximately $84 million in receivables payable by the Antiguan government), the Antiguan court’s judgment (and, by extension, that of the liquidators) in handling the Antiguan liquidation is not to be trusted. At an equitable level, the SEC argues that the Antiguan liquidators may not urge the Antiguan courts to ignore the SEC’s receivership, then request that Judge Godbey recognize their liquidation.

– The Receiver. Mr. Janvey – himself acting as the arm of the District Court’s equitable jurisdiction – argues that the Court’s exclusive control over the Stanford entities through his receivership is . . . well, equitable.

Janvey’s 24-page brief is generally consistent with that of the SEC and, in the end, reduces itself to the old adage that “there are too many cooks in the kitchen”: It accuses Messr’s. Wastell and Hamilton-Smith of grabbing for control of substantially all of the Stanford entities’ assets through their administration of one Stanford entity, of attempting to “end run” the Texas receivership through a Canadian proceeding, of standing idly by while the Antiguan government seeks to appropriate Antiguan real estate otherwise available for general creditors’ benefit, and of generally hampering the Receiver’s job.

Mr. Janvey further argues there is nothing to preclude the District Court from exercising its very broad equitable powers to enjoin a Chapter 15 proceeding.

– The Examiner. In a thoughtful brief, John Little – an Examiner appointed by Judge Godbey to assist him in running the receivership – advises the Court that, in fact, it is a good idea to first permit the commencement of a Chapter 15 case, then to address the validity of the Antiguan liquidators’ requests for recogntion on their own legal and factual merits.

Essentially, Mr. Little, while not disagreeing that a District Court sitting in equity has broad discretion, suggests that Judge Godbey utilize that discretion to grant the liquidators’ request, then determine (i) whether Messr’s. Hamilton-Smith’s and Wastell’s request for recognition is viable or otherwise impermissible on the grounds that SIB is a “foreign bank,” ineligible for Chapter 15 relief; and (ii) if recognition applies, whether SIB’s “center of main interests” is Antigua, or elsewhere.

– The Liquidators. Messr’s. Hamilton-Smith and Wastell call the Receiver’s and the SEC’s mud-slinging exactly what it is . . . then waste precious little time in slinging their own.

In a number of reprises, all of which end in the same refrain – “The Pot is Calling the Kettle Black” – the Antiguan liquidators bristle with indignance at the misconduct alleged of them, accuse Mr. Janvey and his federal government allies of misstating both the facts and the law, and point out that many of the “parade of horribles” supposedly arising in Antiguan insolvency proceedings apply with equal force (or much worse) in US-based federal equitable receiverships.

They note, for example, that Judge Godbey’s refusal to entertain a request for recognition will do nothing to prohibit courts with Stanford-related insolvency proceedings now pending in the UK, Switzerland, and Canada from refusing the same recogntion to Mr. Janvey – and will therefore fail to accomplish the global administration and control Mr. Janvey seeks. Likewise, the IRS’s complaint that Antiguan insolvency proceedings do not embrace a priority scheme analogous to the US Bankruptcy Code strikes Messr’s. Hamilton-Smith and Wastell as ironic, since the distribution that arises under a federal receivership is entirely arbitrary, and effectively outside any statutory distribution scheme (including the US Bankruptcy Code’s).

Amidst the name-calling and the attempts to find precedent in a federal receivership which appears, by all accounts, to be one of first impression, it may be easy to miss the importance – and the potential – of the wide discretion provided to the US District Court in Chapter 15.

This discretion appears in at least two ways.

First, a US Court applying Chapter 15 is generally free to communicate and coordinate insolvency proceedings directly with courts of other jurisdictions. Prior to Chapter 15’s enactment, it was common practice for separate courts administering a multi-national insolvency to confer directly by means of “protocols” specifically designed for the purpose of administering the case at hand. These “protocols” – often individually negotiated for a specific case – facilitated adminsitration and helped coordinate the rulings of various courts for maximum efficiency and uniformity. Much of this former practice lives on in Chapter 15: Section 1525 specifically codifies and authorizes it, while Section 1527 lists several, non-exclusive means of such cooperation.

Second, US Courts applying Chapter 15 have broad discretion to grant, modify, or otherwise tailor relief for foreign representatives, thereby shaping the administration of a foreign case inside the US. Though certain types of relief are “automatic” upon recognition of a foreign “main” case, Section 1522 permits a court to “modify or terminate” much of the relief available to foreign representatives on its own motion, and in a manner which protects all of the entities involved.

How might a Chapter 15 proceeding alleviate some of the rancor that has developed between Mr. Janvey and his Antiguan counterparts?

Perhaps some coordination and cooperation of the sort envisioned by the Bankruptcy Code – for example, web conferencing between judges in Antigua, the UK, the US, Canada, and Switzerland designed to develop a “Stanford protocol” within the context of Chapter 15’s provisions and foster unified worldwide administration of the Stanford cases – would go some distance toward establishing the judicial “end game” that preserves the integrity of the federal receivership process and of the foreign insolvency proceedings.

Along the way, the same cooperation might further demonstrate the remarkable flexibility of Chapter 15. And who knows? It might prevent all of the cooks in the kitchen from hitting one another with blackened pots . . . thereby preserving a little more for Stanford’s creditors and investors.